Burberry and the recovery in the pound

Jonathan Wright
Jonathan Wright
Fidelity Personal Investing18 January 2018

The weak pound since the Brexit referendum meant fewer dollars and euros in our pockets on holiday last year, but of course it had the opposite effect on those visiting the UK. Tourists like to shop and one of the main beneficiaries was the luxury British brand Burberry, but it seems their fortunes are changing as the pound begins to strengthen.

Last year was a record year for inbound tourism to the UK with 39.9m people visiting our shores. While our stately homes and castles continue to attract high visitor numbers, the draw of key shopping areas such as London’s West End should not be under-estimated. In fact last year’s tourist boom helped propel London’s Bond Street to become the world’s third most expensive street to locate a store, behind New York’s Upper Fifth Avenue in first place and Hong Kong’s Causeway Bay, according to property company Cushman & Wakefield.

Yesterday, Burberry, one of Bond Street’s most iconic residents, announced like-for-like sales in its home market fell by 2% over the important Christmas period, which was below analyst forecasts of 3%. This compares to growth of 40% over the same period last year.

In November the company announced plans to go more upmarket and close stores in areas it feels are not luxurious enough. It also unveiled plans to change its product mix to dress customers from top to toe with a range of trousers and tops, which sell for a lower price than its signature trench coats. Investors aren’t so sure and the company’s share price has tumbled since then.

On a more positive note the drop in UK sales were offset by growth in continental Europe and mainland China. As ever, Burberry would be wise to continue looking east as China’s growing middle class seek more expensive brands to spend their new found wealth on.

Last year, around 70% of the luxury bargain hunters visiting the UK were Chinese. They are now shifting their shopping trips to Japan which is nearer and cheaper.

As China continues to focus on developing its domestic economy, the Chinese consumer will be a key focus for many Western brands. According to the Economist Intelligence Unit, China will become a middle-class society by 2030, based on income measures. Currently around 40% of the population is classified as low-income. By 2030 that figure is likely to drop to 11% and around 75% of the 1.4 billion population will be considered middle-income.

This growing middle-class is especially attractive for Western retailers with consumer-focused international brands. Luxury brands such as Burberry and LVMH have particularly benefited lately, helped further by the fact that China has a lack of well-known luxury brands of its own. 

Sales of luxury goods in China hit 142 billion yuan last year (£16bn), up around 20% from the year before according to consultancy Bain & Co. This is the sharpest growth since 2011, when luxury sales started to be hit by slower economic growth and a government crackdown on corruption.

China’s domestic market makes up 8% of global luxury sales, according to Bain and despite the fast growth at home, Chinese shoppers still make three-quarters of their luxury purchases overseas.

However with a rising pound savvy shoppers from overseas will be looking elsewhere for bargains, which will impact London’s top stores reliant on tourists’ spending money. Luxury brands such as Burberry will be hoping their investment in stores across the world will be diversified enough to catch the growth in China’s middle class wherever they decide to shop.

One fan of the ongoing power of brands to deliver meaningful returns to shareholders is Nick Train, manager of the LF Lindsell Train UK Equity Fund, one of our Select 50 recommended funds.  He still believes in Burberry and the company appears in the fund’s top ten holdings.

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